Advertising Law - January 2017 #2

by Manatt, Phelps & Phillips, LLP

Manatt, Phelps & Phillips, LLP

In This Issue:
  • SPECIAL FOCUS: Ohlhausen Named Acting Chair of FTC
  • D-Link's Alleged Security Failures Achieve FTC Lawsuit
  • SpongeBob SquarePants Eatery Gets TM Protection
  • Star Magazine to Drop Ad Format Challenged by NAD

SPECIAL FOCUS: Ohlhausen Named Acting Chair of FTC

By Marc Roth

On January 24, 2017, President Donald Trump designated Maureen Ohlhausen as acting chairwoman of the Federal Trade Commission. Ohlhausen, a Republican, has been serving as an FTC commissioner since 2012 and is a noted critic of government regulation. Her appointment was a surprise to no one, but is notable as a departure from President Trump's recent appointment of industry leaders from beyond the beltway. Ohlhausen replaces Edith Ramirez, a Democrat, who announced her resignation earlier this month. After Ramirez's departure in February, the Commission will have only two commissioners, Ohlhausen and Democrat Terrell McSweeny. President Trump will then likely fill the remaining seats to form a Republican majority.

On news of her appointment, Ohlhausen commented "I am deeply honored that President Trump has asked me to serve as Acting Chairman of the FTC and to preserve America's true engine of prosperity: a free, honest, and competitive marketplace." She added, "I will work to protect all consumers from fraud, deception and unfair practices."

Ohlhausen's appointment is the culmination of almost 15 years of service at the Commission over two tours, including four years as director of the agency's Office of Policy Planning. She has been a vocal critic of many FTC actions, often dissenting on the Commission's issuance of complaints and approval of settlements that lacked, in her view, sufficient evidence to support agency action. Her most notable dissents were in the recent $20 million settlement with Uber, the agency's suit against Qualcomm for allegedly using market power to restrain trade in the semiconductor market and its complaint against D-Link for failing to use reasonable data security practices to protect those who use the company's wireless router and camera products.

Signaling her hands-off approach to regulation reminiscent of prior Republican chairs, Ohlhausen tweeted on the day of her appointment, "So honored @POTUS chose me as acting FTC Chairman. I will protect consumers, promote competition & econ liberty; & shrink regulatory burden." Further cueing her faith in a free marketplace is her frequent use of the hashtag "#RegulatoryHumility" in her tweets.

In addition to her skepticism of the FTC's regulatory activities, Ohlhausen has also criticized the Federal Communications Commission, particularly with regard to its attempt to regulate privacy and security on the Internet, an area she believes is best served by the FTC, and its approach to net neutrality, a position she shares with fellow Republican Ajit Pai, the newly appointed Chair of the FCC. On the day of her appointment, she tweeted, "@AjitPaiFCC knows markets can protect #NetNeutrality values w/o the drag of gov regs. I agree! My new paper:"

News of Ohlhausen's appointment had an immediate impact on companies with merger applications before the Commission. Investor's Business Daily reported that shares of Rite Aid and Walgreen's fluctuated on news of the appointment, which bolstered the possibility that a Republican majority Commission would approve the merger of the two drug store chains.

Ohlhausen's current appointment runs until September 2018 and she will need not be re-nominated and approved by Congress.

Why it matters: With a Republican now at the helm of the FTC and the likelihood that two additional like-minded commissioners will join her, the FTC's aggressive enforcement posture over the past eight years—particularly with respect to data security—will presumably abate. Chairwoman Ohlhausen is considered by many to be a thoughtful and smart regulator who applies a reasoned approach to matters. But as she strongly believes in the free market and is skeptical of the government's role in reigning in commerce, she will likely head a Commission that is not inclined to aggressively pursue cases that do not present real harm to consumers or appear to pose a significant threat to the marketplace.

D-Link's Alleged Security Failures Achieve FTC Lawsuit

In its latest enforcement action in the realm of the Internet of Things, the Federal Trade Commission filed suit against D-Link Corporation, a Taiwan-based computer networking equipment manufacturer and its U.S. subsidiary, alleging that the defendants failed to employ adequate security measures for their wireless routers and Internet cameras.

Although D-Link promoted the security of its routers with claims like "EASY TO SECURE" and "ADVANCED NETWORK SECURITY," the company neglected to take easy steps to avoid security flaws, the agency asserted in its California federal court complaint. According to the agency, D-Link accepted hard-coded login credentials and the use of "command injection," which allowed remote attackers to take control of routers by sending commands over the Internet.

The defendants also openly displayed a private key code used to sign into D-Link software on a public website for six months and allowed user login credentials on D-Link's mobile app to remain in clear, readable text on mobile devices—despite the availability of free software that could have secured the information, the FTC alleged.

All of these errors left consumers vulnerable, the agency said, as a hacker could take advantage of a compromised router to obtain stored files (tax returns, for example), redirect a consumer to a fraudulent website, or leverage the router to attack other devices on consumers' local networks such as smartphones, computers, and other connected appliances.

As for the unsecure cameras, D-Link's actions placed consumers at risk of having their personal activities and conversations recorded and watched or their locations monitored, which could make theft or other crimes much easier to commit, the agency told the court.

The suit seeks a permanent injunction against future violations of the Federal Trade Commission Act, as well as costs.

D-Link responded to the lawsuit with a statement on its website denying "the unwarranted allegations outlined in the FTC complaint" and stating its plans to "vigorously defend the action." The company also noted that the agency's complaint "does not allege any breach of any product sold by D-Link Systems in the U.S."

To read the complaint in FTC v. D-Link Corporation, click here.

Why it matters: The complaint against D-Link furthers the agency's efforts with regard to privacy and security in the Internet of Things, the agency noted. "Hackers are increasingly targeting consumer routers and IP cameras—and the consequences for consumers can include device compromise and exposure of their sensitive personal information," Director of the FTC's Bureau of Consumer Protection Jessica Rich said in a statement. "When manufacturers tell consumers that their equipment is secure, it's critical that they take the necessary steps to make sure that's true." Commissioner Maureen Ohlhausen voted against filing the suit but did not comment on her decision.

SpongeBob SquarePants Eatery Gets TM Protection

The Krusty Krab, a fictional restaurant from the SpongeBob SquarePants cartoon, deserves trademark protection, a federal court judge in Texas has ruled, holding that a proposed real-life eatery with the same name violates Viacom's trademark rights.

The Krusty Krab is featured prominently in the antics of SpongeBob and friends, who enjoy the restaurant's "Krabby Patties" with regularity. But when IJR Capital Investments filed a trademark application for its restaurant "The Krusty Krab" under the U.S. Patent and Trademark office's restaurant services category, Viacom sent IJR a cease and desist letter. When IJR refused to comply, Viacom filed suit under the Lanham Act and Texas common law.

Viacom argued in its motion for summary judgment that while it never registered "The Krusty Krab" mark, it has used the term continuously since 1999 in two feature films, in at least 166 television episodes and with associated merchandise.

U.S. District Court Judge Gray H. Miller first determined that Viacom possessed a valid mark and then held that IJR's use of the mark created a likelihood of confusion, ruling in favor of the plaintiff.

But, IJR argued that Viacom could not trademark the name of a fictional restaurant.

The court disagreed. "[T]rademark protection extends to the 'specific ingredients of a successful T.V. series,' including symbols, design elements, and characters which the public directly associates with the plaintiff or its product," Judge Miller wrote, citing decisions granting protection for made-up words such as "Kryptonite" and the "Daily Planet," the fictional newspaper where Clark Kent of the Superman franchise works.

Moreover, ownership of a trademark is established by use, not by registration, the court noted, and there was no dispute that Viacom had regularly used "The Krusty Krab" for well over a decade.

Despite the fact SpongeBob is not as well known as Superman, because The Krusty Krab "is a recurring element of the 'SpongeBob SquarePants' show, the court finds that the mark is eligible for trademark protection," the court said. Viacom also demonstrated through a preponderance of evidence that it met several of the "distinctiveness through secondary meaning" factors established by other courts, including the length and use of the mark as well as the reach of the movies and associated ad campaigns ($470 million in gross receipts and $197 million in advertising).

Judge Miller next found a likelihood of consumer confusion, by citing factors such as the strength of the mark based on its continued use in its television series, movies, Web and mobile applications, and the number of licensed products that reference or directly mention "The Krusty Krab."

The court also found it notable that the two marks had identical spelling and pronunciation, including the unconventional way of spelling the words with a "K" instead of a "C," and the fact that both parties use the mark in connection with a restaurant.

"Context here is critical, because a consumer seeing either Viacom's or IJR's marks will likely think of a restaurant," the judge wrote. "Consumers may mistakenly believe that IJR's restaurant is an officially licensed or endorsed restaurant, similar to how Viacom's parent company … has licensed its marks for restaurants, including Bubba Gump Shrimp Co., a seafood restaurant chain inspired by the 1994 film 'Forrest Gump.'"

A national consumer survey tipped the scale in Viacom's favor. It found that 30 percent of respondents who have or expect to patronize restaurants identified Viacom and its brand as the entity that operates, affiliates, connects, approves, or sponsors a restaurant named "The Krusty Krab."

The court granted summary judgment in favor of the plaintiff on its motion for trademark infringement. Viacom's motion for summary judgment on its dilution claims was denied, however, as the court found the claim unripe since IJR had yet to use the mark in commerce.

To read the opinion and order in Viacom International, Inc. v. IJR Capital Investments, LLC, click here. Link: I sent PDF

Why it matters: The court had no problem holding that a fictional restaurant featured in a cartoon show deserved trademark protection because Viacom used the name in television, movies, and associated merchandise for roughly 17 years. A likelihood of consumer confusion was also demonstrated by the identical spelling of the two restaurants (even though one exists in a fictional world under the sea and the other was set to open in Texas), and the results of the consumer survey.

Star Magazine to Drop Ad Format Challenged by NAD

Star Magazine will change the format of its advertisements as a result of a recent inquiry by the National Advertising Division.

The self-regulatory body expressed concern that ads appearing in the weekly magazine blurred the line between advertising copy and editorial content. For example, one front cover of Star featured what appeared to be an article on weight loss with claims such as, "Joann LOST 40 lbs" and "snack away the weight." The cover directed readers to page 46, where an article titled "Snack Your Way to Slim" told the stories of three women who "met their weight loss goals the easy way—by picking a plan that works and giving in to their cravings," and further stating that SlimFast is the "superfast slim-down secret."

In a second instance, Star ran an article titled "The Ultimate Coffee Break! Kick-start your day and lose weight" that promoted high-protein meal replacement shakes from SlimFast.

Although the cover story and inside articles appeared to be editorial content, they were in fact advertisements for SlimFast.

"Advertising in a format that appears to be editorial has the potential to mislead or confuse consumers because consumers may attach a different weight or significance to editorial content than to pure advertising content," the NAD wrote.

In response to the inquiry, Star's publisher, American Media, advised the NAD that the magazine will no longer run advertisements using the format to advertise the SlimFast product.

To read the NAD's press release about the case, click here.

Why it matters: The NAD's inquiry provides a warning to advertisers about the importance of differentiating between editorial content and advertising. The self-regulatory body cited the Federal Trade Commission's Enforcement Policy Statement on Deceptively Formatted Advertisements to emphasize that "deception occurs when an advertisement misleads reasonable consumers as to its true nature or source, including that a party other than the sponsoring advertiser is the source of an advertising or promotional message, and such misleading representation is material. In this regard, a misleading representation is material if it is likely to affect consumers' choices or conduct regarding the advertised product or the advertisement, such as by leading consumers to give greater credence to advertising claims or to interact with advertising with which they otherwise would not have interacted."


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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